Stock-Based Compensation

Stock-based compensation expense recognized in the financial statements is as follows (in thousands):



										Predecessor Company
	Year Ended December 31, 2013			Year Ended December 31, 2012			Three Hundred Forty-One Days Ended December 31, 2011			Twenty-Four Days Ended January 24, 2011



Amounts charged against income, before income tax benefit	$	5,807		$	4,055		$	3,810		$	5,499
Amount of related income tax benefit recognized in income	(2,326		)	(1,656		)	(1,552		)	(2,220		)
Total net income impact	$	3,481		$	2,399		$	2,258		$	3,279

At December 31, 2013, the Company had $1.6 million of stock-based compensation cost related to non-vested awards that will be recognized over a weighted average period of 1.60 years, all of which is related to awards granted under the FairPoint Communications, Inc. 2010 Long Term Incentive Plan (the "Long Term Incentive Plan").

Long Term Incentive Plan

The Long Term Incentive Plan provides for grants of up to 3,134,603 shares of common stock awards, of which stock options and restricted stock awards can be granted. Pursuant to the terms of the Long Term Incentive Plan, if the consolidated enterprise value of the Company (as defined in the Long Term Incentive Plan) does not equal or exceed $2.3 billion on or prior to the expiration of the warrants, then the aggregate number of shares available for issuance of future awards will be automatically reduced by 310,326 shares. As of December 31, 2013, there are 972,399 shares available for grant under the Long Term Incentive Plan prior to the share reduction clause noted in the Long Term Incentive Plan. Each stock option or restricted stock award granted reduces the availability under the Long Term Incentive Plan by one share. Upon the exercise of each stock option or vesting of each restricted share award, one new share of common stock will be issued.

On the Effective Date, certain of the Company's employees, a consultant of the Company and members of the board of directors were granted stock options and/or restricted stock awards. The restricted stock awards granted to the consultant of the Company were 100% vested on the Effective Date. The remaining restricted stock awards and stock options granted to the Company's employees and members of the board of directors on the Effective Date vested 25% immediately, with the remainder of these awards to vest in three equal annual installments, commencing on the first anniversary of the Effective Date, with accelerated vesting upon (x) a change in control or (y) a termination of an award holder's employment either without cause (but only to the extent the vesting becomes at least 50%, plus an additional 25% for each full year of the award holder's employment after the first full year after the Effective Date) or due to the award holder's death or disability (but, for stock options, only to the extent vesting would have otherwise occurred within one year following such termination of employment).

Subsequent to the Effective Date, through December 31, 2013, the Company has granted additional shares of restricted stock and stock options with one of the following vesting terms: (i) vest immediately; (ii) vest 100% on the first anniversary; (iii) vest over three equal annual installments, with one-third vesting on the first anniversary of the grant date and one-third on the second and third anniversaries thereafter or (iv) vest 25% immediately and 25% on the first, second and third anniversaries thereafter.

Stock Options. Stock options have a term of 10 years from the date of grant; however, vested stock options will generally expire 90 days after an employee's termination with the Company, unless the Company is in a blackout period. Stock option activity under the Long Term Incentive Plan is summarized as follows:



	Options Outstanding		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)
Outstanding at January 24, 2011 (Predecessor Company)	—		—
Granted ^(a)	991,012		$	24.29
Exercised	—		$	—
Forfeited	—		$	—
Expired	—		—
Outstanding at January 24, 2011 (Post-emergence entity)	991,012		24.29
Granted ^(a)	26,600		$	24.29
Exercised	—		—
Forfeited	(69,875	)	$	24.29
Expired	—		—
Outstanding at December 31, 2011	947,737		$	24.29
Granted ^(a)	347,880		$	4.82
Exercised	(14,212	)	4.51
Forfeited	(87,783	)	19.32
Expired	(63,793	)	23.96
Outstanding at December 31, 2012	1,129,829		$	18.95
Granted ^(a)	368,016		$	9.37
Exercised ^(b)	(18,750	)	$	4.63
Forfeited	(41,893	)	$	11.95
Expired	(38,079	)	$	22.29
Outstanding at December 31, 2013	1,399,123		$	16.74	7.6

Exercisable at December 31, 2013 ^(c)	823,012		$	19.57	6.9
Vested and Expected to Vest at December 31, 2013 ^(d)	1,399,123		$	16.74	7.6

(a)

During the years ended December 31, 2013 and December 31, 2012, the 341 days ended December 31, 2011 and the 24 days ended January 24, 2011, the weighted average grant date fair value of stock options granted was $1.5 million, $0.7 million, $0.1 million and $8.1 million, respectively. For purposes of determining compensation expense, the grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model which requires the use of various assumptions including the expected life of the option, expected dividend rate, expected volatility and risk-free interest rate. Key assumptions used for determining the fair value of stock options granted were as follows:



							Predecessor Company
	Year Ended December 31, 2013		Year Ended December 31, 2012		Three Hundred Forty-One Days Ended December 31, 2011		Twenty-Four Days Ended January 24, 2011



Expected life ⁽¹⁾	5.5 - 6 years		5.75 - 6 years		10 years		5.75 years
Expected dividend ⁽²⁾	—		—		—		—
Expected volatility ⁽³⁾	45	%	45	%	45	%	45	%
Risk-free interest rate ⁽⁴⁾	0.77% - 1.92%		0.82% - 1.21%		2.29% & 3.17%		2.37	%

(1)

The 5.5-year, 5.75-year and 6.00-year expected lives (estimated period of time outstanding) of stock options granted were estimated using the ‘Simplified Method' which utilizes the midpoint between the vesting date and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of the Company's employees. The 10.00-year expected life of stock options granted during the 341 days ended December 31, 2011 was based on an expectation of the estimated period of time the Company believed the stock options granted to an employee during this time period would be outstanding upon an analysis of stock options' strike price.


(2)	For all stock options granted during 2011, 2012 and 2013, no dividends are expected to be paid over the contractual term of the stock options resulting in the use of a zero expected dividend rate.


(3)	The expected volatility rate is based on the observed historical and implied volatilities of comparable companies, which were adjusted to account for the various differences between the comparable companies and the Company.


(4)	The risk-free interest rate is specific to the date of grant. On the Effective Date, the risk-free interest rate was interpolated from the yields on the 5-year and 7-year United States Treasury bonds. For stock options granted after the Effective Date, the risk-free interest rate is based on the United States Treasury 10-year constant maturity market yield in effect at the time of the grant.


(b)	During the years ended December 31, 2013 and 2012, the total intrinsic value of stock options that were exercised was negligible.


(c)	Based upon a fair market value of the common stock as of December 31, 2013 of $11.31 per share, the stock options that are exercisable have an aggregate intrinsic value (equal to the value of in-the-money stock options above their respective exercise price) of $1.0 million.


(d)	Based upon a fair market value of the common stock as of December 31, 2013 of $11.31 per share, the stock options that have vested and are expected to vest have an aggregate intrinsic value (equal to the value of in-the-money stock options above their respective exercise price) of $2.5 million.

Based upon the respective grant fair value, the aggregate fair value of stock options that vested during the years ended December 31, 2013 and December 31, 2012, the 341 days ended December 31, 2011 and the 24 days ended January 24, 2011 was $2.2 million, $2.0 million, $0.1 million and $2.0 million, respectively.

Restricted Stock Awards. Restricted stock award activity under the Long Term Incentive Plan is summarized as follows:



	Awards Outstanding		Weighted Average Grant Date Fair Value Per Share
Non-vested at January 24, 2011 (Predecessor entity)	—		—
Granted ^(a)	547,792		$	18.53
Vested ^(b)	(187,044	)	18.53
Forfeited	—		—
Non-vested at January 24, 2011 (Post-emergence entity)	360,748		$	18.53
Granted ^(a)	13,800		$	11.52
Vested ^(b)	(4,900	)	17.87
Forfeited	(17,650	)	18.53
Non-vested at December 31, 2011	351,998		$	18.26
Granted ^(a)	30,000		$	5.51
Vested ^(b)	(116,202	)	$	18.26
Forfeited	(21,550	)	$	18.49
Non-vested at December 31, 2012	244,246		$	16.65
Granted (a)	184,610		$	9.46
Vested (b)	(157,318	)	$	15.24
Forfeited	(6,883	)	$	10.43
Non-vested at December 31, 2013	264,655		$	12.64

(a)

Except for the restricted stock awards granted on the Effective Date, the grant date fair value per share of the restricted stock awards under the Long Term Incentive Plan is calculated as the fair market value per share of the common stock on the date of grant. The grant date fair value per share of the restricted stock awarded on the Effective Date is equal to the fair value per share of the Company's common stock calculated in conjunction with fresh start accounting. During the year ended December 31, 2013, the year ended December 31, 2012, the 341 days ended December 31, 2011 and the 24 days ended January 24, 2011, the weighted average grant date fair value of restricted stock awards granted was $1.7 million, $0.2 million, $0.2 million and $10.2 million, respectively.


(b)	Based upon the respective grant date fair value, the aggregate fair value of restricted stock which vested during the year ended December 31, 2013, the year ended December 31, 2012, the 341 days ended December 31, 2011 and the 24 days ended January 24, 2011 was $2.4 million, $2.1 million, $0.1 million and $3.5 million, respectively.

Stock-Based Compensation Plans of the Predecessor Company

Prior to the Effective Date, the Company had stock options, stock units, non-vested stock and restricted stock activity under various stock-based compensation plans of the Predecessor Company. Pre-tax stock compensation expense recognized during the 24 days ended January 24, 2011 for the Predecessor Company was immaterial.

Pursuant to the Plan, all then outstanding equity interests of the Company, including but not limited to all outstanding shares of common stock, options and contractual or other rights to acquire any equity interests, were canceled and extinguished on the Effective Date.